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Korea Monetary Policy February 2017

Korea: Bank of Korea stays put in February and maintains easy stance

February 23, 2017

At its 23 February meeting, the Bank of Korea (BoK) announced its decision to maintain the base rate unchanged at .25%, a decision in line with market expectations. The BoK had lowered interest rates by 25 basis points in June 2016 in what it had described as a preemptive move and has since refrained from making any further changes to the rate.

Korea’s policy makers have found themselves in a difficult position as the domestic economy remains subdued, while price pressures are expected to increase as a result of a weaker won and higher energy prices. Prospects of higher inflation, along with the possibility of faster-than-expected Fed rate hikes, have narrowed the Bank’s space for further monetary easing. Consumption is likely to underperform this year as the country’s current political turmoil continues to hurt consumer confidence, but exports should see a strong recovery thanks to improving external conditions. Consequently, the Bank maintained its 2.0% growth projection.

The Central Bank’s official statement was devoid of strong forward guidance but highlighted that it will closely monitor uncertainties in domestic and external conditions such as the Fed’s pace of monetary policy normalization, and Korea’s high levels of household debt.

Against a backdrop of global uncertainties and concerns about the domestic political turmoil, some of our analysts still have expectations for further BOK easing toward the end of this year. Some panelists project that the policy rate will be cut further to 1.00% at the last meeting of the year. On average, FocusEconomics Consensus Forecast panelists expect the base rate to end 2017 at 1.12%. In 2018, analysts see the Bank maintaining its monetary stance and expect the base rate to end the year at 1.21%.

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